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ECB could boost bond buying by another trillion euros, economist projects

FRANKFURT AM MAIN, GERMANY - MARCH 12: Christine Lagarde (R), President of the European Central Bank (ECB), and Vicepresident Luis de Guindos (L) speak to the media following a meeting of the ECB governing board at ECB headquarters on March 12, 2020 in Frankfurt, Germany.

Thomas Lohnes

The European Central Bank (ECB) could expand its bond-buying program by a further 1 trillion euros ($1.12 trillion) over the next two to three years as inflation takes center stage, according to Berenberg European Economist Florian Hense.

The central bank earlier this month increased its Pandemic Emergency Purchase Programme (PEPP) by 600 billion euros to a total of 1.35 trillion euros in a bid to shore up the economy against the fallout from the coronavirus pandemic.

In a note Friday, Hense said that while the market broadly anticipates one more expansion of the PEPP envelope by around 500-600 billion euros, the ECB could deliver a total increase of between 800 billion and 1.6 trillion euros, depending on the inflation outlook, the success of the ECB's long-term loans, and the currently paused monetary policy strategy review.

The unprecedented scale of asset purchases has succeeded in soothing financial markets following a historic downturn as the coronavirus spread throughout the world, and Hense anticipates that it will now have to turn its attention to inflation.

Hense identified the most important decision at the ECB's Governing Council meeting earlier this month as the linking of the 600 billion euro PEPP increase explicitly to the "pandemic-related downward revision to inflation over the projection horizon."

"Linking the PEPP increase to the inflation downgrade is a clear sign that the ECB has shifted its focus from short-term crisis management towards supporting the economic recovery over the medium term," Hense said.

"It has managed to stabilize markets very effectively, but returning to the 'pre-Covid inflation...

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